POPULAR RHETORIC in the news media and in political discussions claims that with the fall of communism, free-market economics has triumphed around the world. In fact, this is not the case. While Soviet-style socialist central planning is dead, laissez-faire capitalism is neither advocated nor practiced in the countries around the globe. What is hailed as the “free market” is actually the interventionist-welfare state.

Among the critics of socialism in the 20th century, the Austrian economists were the most devastating in their effect. Ludwig von Mises and Friedrich A. Hayek demonstrated that the elimination of private property and competitively determined prices in the market destroyed the ability to make rational economic calculations and to use the resources in society efficiently.

The Austrians have been no less devastating in their criticisms of the interventionist-welfare state. And the leading opponent of all forms of intervention among the Austrians was Ludwig von Mises. In 1929, Mises published a collection of essays entitled Critique of Interventionism (see the review in Freedom Daily, April 1997), in which he argued that government interventions and regulations of market activity create imbalances and distortions in the economy that are counterproductive even from the intervenor’s own point of view but which often serve as the rationale for the interventions and controls to be extended over an increasing circle of market transactions. He restated his criticisms of the interventionist state in his treatise Human Action (1949) and in Planning for Freedom (1952).

In 1970, Austrian economist Murray N. Rothbard presented another comprehensive critique of interventionism in his book Power and Market: Government and the Economy. In 1978, Israel M. Kirzner published The Perils of Regulation: A Market-Process Approach. In the same year, Stephen Littlechild published The Fallacy of the Mixed Economy: An “Austrian” Critique of Conventional Economics and Government Policy. And Dominick Armentano’s Antitrust and Monopoly (1982) demonstrated, both theoretically and historically, the errors and failures of many of the major interventionist policies in America.

Sanford Ikeda’s new book, Dynamics of the Mixed Economy: Toward a Theory of Interventionism, is thoroughly in this Austrian tradition. Indeed, he takes the contributions of the earlier Austrian economists and develops a theory of why interventionism, once introduced into the market, has a tendency to expand, reach a crisis point, and then to either continue down the collectivist road to socialism or reverse itself back in the direction of a freer economy. He also suggests that even a minimalist state, in which the government is severely limited in its assigned functions, may still be susceptible to the interventionist disease.

Ikeda reminds his readers that Hayek and Kirzner had emphasized that the free market facilitates the acquisition and use of two types of knowledge. First, there is what Hayek called the localized knowledge of time and place — knowledge that is inevitably divided among the various members of society as a result of a complex system of division of labor. The knowledge possessed by these multitudes of people is coordinated by the price system, with every change in any supply or demand being transmitted as useful information to all the other members of the society in the form of changes in those market prices.

Second, there is what Kirzner called radical ignorance. This is knowledge that individuals do not know they do not have. The discovery of unknown things — for example, market profit opportunities and creative ways of innovating production — only comes about through the process of market competition, in a setting in which market actors have the freedom and profit incentive to search for and be alert to things that they previously didn’t know about.

Government interventions that fix prices, regulate the methods of production, or limit competition in and between markets are hindrances to the acquisition and use of both types of knowledge. The result is to diminish the capacity of the market participants to adjust to changing circumstances, discover profit opportunities, and efficiently use the resources at their disposal.

But the crux of the Austrian critique of interventionism, which Ikeda develops, is that once interventions are introduced, they tend to expand throughout the economy. Interventions necessarily throw markets out of balance. By setting prices at nonmarket clearing levels or by preventing changes in the methods and location of production in the face of changed market conditions, the interventions generate surpluses or shortages of goods, create market losses or diminished profits, or result in unemployed or misemployed resources. The dislocations created by such imbalances eventually become visible and set the stage for the proponents of intervention to make the case that new interventions must be introduced to compensate for the imbalances the earlier interventions have created, but which they blame on various “market failures.”

Why is there an obstacle to seeing that it is the earlier interventions that have caused the new problems and that the real answer is to return to a free market? Ikeda suggests that given a statist ideological bent in the society, it becomes natural to see the market as the problem rather than the government’s intrusions into the marketplace. Furthermore, the very complexity of market activities makes it difficult for many to follow the logical chains of causation that would clearly point the figure of guilt at the interventionist policies themselves. Besides, the more the state intervenes and politicizes market relationships, the more a growing number of people begin to turn to the state for additional counterinterventions to provide them with protections and “social safety nets” from both the remaining market forces and the earlier interventions.

Eventually the cumulative negative effects of the interventionist-welfare state reach a crisis point. It is at this moment that the society either turns back toward a free market or marches on into more comprehensive collectivism. But for there to be a return to a free market, Ikeda argues, there must be a radical ideological shift that renounces a belief in the interventionist and collectivist ideals and methods. The path towards greater collectivism, on the other hand, merely requires further steps down the same road the incremental interventions have been moving the society all along.

Even if the society turns back to the free market and establishes a minimalist state, Ikeda fears that it always harbors the possibility of starting down the interventionist path once more. Why? Because even if the general population now shares a common view in the desirability of limited government, there will certainly still be differences of opinion about how minimalist that state should be. There will be appeals for “small” or “very limited” or “essential” interventions; and once any of these are introduced their negative effects and the difficulty of clearly proving that the negative effects have been solely caused by the interventions themselves can easily set the interventionist process in motion once again.

Sanford Ikeda’s analysis is not an optimistic one for proponents of a truly free society. But it must be taken seriously if successful strategies for liberty are to be devised.

Share This Article

Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).

Reading List

Prepared by Richard M. Ebeling

Austrian economics is a distinctive approach to the discipline of economics that analyzes market forces without ever losing sight of the logic of individual human action. Two of the major Austrian economists in the 20th century have been Friedrich A. Hayek, who won the Nobel Prize in Economics, and Ludwig von Mises. Posted below is an Austrian Economics reading list prepared by Richard M. Ebeling, economics professor at Northwood University in Midland and former president of the Foundation for Economic Education and vice president of academic affairs at FFF.